Risk Management

Risk management is critical when trading stocks and options. Learn more about position sizing, hedging, and managing risk for positions and your portfolio.

Risk management is critical when trading stocks and options. Risk management involves a variety of strategies that can help you manage risk and protect your portfolio.

There is no "one-size-fits-all" solution to risk management. Each trader must assess his or her own risk tolerance and develop a strategy for their goals and preferences.

The key to successful risk management is always knowing your exposure and to have a plan for managing risk. Start by assessing your risk tolerance level. Your risk tolerance level is the amount of risk you are willing to take. This can vary by time horizon and your financial situation.

Once you know your risk tolerance level, you can develop a risk management strategy. A good risk management strategy helps you manage your overall risk exposure, limit your losses, and protect your profits.

Risk management strategies include position sizing, hedging, and rolling options positions.

Position sizing is the practice of carefully determining asset allocation, risk-reward ratio, market conditions, and profit goals. Position sizing often involves only risking a percentage of an account's equity on any one position.

Hedging is a risk management technique that involves taking offsetting positions in different assets in order to reduce exposure to risk. Hedging enables you to protect your existing investment positions by opening alternative positions that offset other losses. 

For example, a trader who is long a stock may buy put options on the same stock.

By effectively managing risk in your trading activities, you can be confident in your ability to achieve your financial goals and minimize potential losses.